NPS Vs PPF - Which is Better & Difference
Retirement can be the best or worst time of your life, depending on how well-prepared you are for it. On the one hand, you will have enough time on your hands to do whatever you want to do, without having to worry about work. On the other hand, you no longer have a regular income from work, which may mean not having the necessary money to meet all of your requirements. Add to that inflation and increasing life expectancy, which can continue for a long time.
This is why retirement planning is so important. Unless you are eligible for a pension when you stop working (and sometimes even if you are), you will have to invest in retirement schemes to live out your golden years comfortably without stress.
That’s why the government of India has made retirement savings possible through specific schemes they offer. The two most essential schemes among these are the Public Provident Fund or PPF and the National Pension Scheme or NPS. Moreover, these schemes come with tax benefits that make them more attractive to citizens. They are covered under Section 80C of the Income Tax Act, meaning you can claim a tax benefit of up to INR 1.5 lakhs by investing in either product.
However, that’s where the similarity ends. They are very different in terms of tenure, returns, lock-in periods, and maturity amount usage. This article will explain the features of both these schemes and their similarities and differences in more detail.
What Is PPF?
PPF, or Public Provident Fund, is a retirement scheme offered by the government of India as a long-term investment option. The lock-in period for this scheme is 15 years, meaning you cannot opt to sell or redeem any benefits from this investment for those many years. The minimum investment amount for PPF is INR 500 per annum (or INR 100 per annum for certain sections of society), while the maximum investment amount for PPF is INR 1,50,000 per annum. Moreover, individuals can open only a single PPF account.
Not investing an amount of INR 500 yearly will leave the account inactive, and you will stop receiving any interest for the period of account inactivity. Additionally, to reactivate the account, you will have to pay INR 500 for every year the account was inactive and an additional INR 500 for the year the account is being reactivated.
What Is NPS?
NPS, or National Pension Scheme, is another retirement plus investment scheme offered by the Pension Fund Regulatory and Development Authority or PFRDA under the government of India. It is available to all adult citizens of India and is a voluntary retirement plan. This means that by opening an NPS account, you will be required to invest a certain amount from your salary into NPS to build a retirement corpus.
NPS interest rates are market-linked, meaning that the amount you invest into NPS will be invested into the market to get you the highest returns based on your risk appetite and the aggressiveness of the scheme you choose.
On retirement, 60% of the corpus built can be withdrawn as a lump sum, while the remaining 40% will be invested in an annuity to receive monthly pensions for a previously chosen time period. Additionally, 60% will be tax-free as investment capital. Moreover, you can also opt to withdraw up to 25% of the corpus before retirement for emergencies. If you want to opt-out before the maturity of the investment, you can get 20% as a lump sum, while the remaining 80% will go towards buying an annuity.
NPS Vs PPF: Which Is Better?
Now that you know what the basic features of NPS and PPF are, let’s compare them. Knowing the similarities and differences between NPS vs PPF will help you decide which of the two investment vehicles is better to invest in.
NPS Vs PPF: Similarities
Both NPS and PPF are long-term investment options that will help you prepare for retirement. The following are the similarities between NPS and PPF:
- Long-term Investment: Both NPS and PPF are long-term investments. This means they have long lock-in periods and require the subscriber to open an account.
- Retirement Funds: NPS and PPF are both retirement funds that allow you to build a retirement corpus for your golden years. That is why they have long lock-in periods and are long-term investments.
- Tax Benefits: Both NPS and PPF come with similar tax benefits. They both fall under Section 80C of the Income Tax Act and allow for tax exemptions accordingly. Thus, investors can declare their investments to either of these schemes to avail of a tax benefit. Additionally, the corpuses formed through these schemes aren't eligible for tax either.
NPS Vs PPF: Differences
While NPS and PPF have some similarities as seen above, they are both very different in their offerings, with the biggest difference being their tenure. The following table includes all the differences between NPS and PPF:
|Parameter||National Pension Scheme||Public Providence Fund|
|Tenure||Subscribers have to keep contributing until the age of 60 years minimum. However, contributions can continue up to the age of 70 if the investor so chooses.||The lock-in period for PPF is 15 years. However, investors can choose to increase their tenure by a block period of 5 years.|
|Eligibility||NPS accounts can be opened by all Indian citizens between the ages of 18 and 60 years. This also includes NRIs.||All citizens of India can open PPF accounts, except NRIs. This includes minors as well.|
|Investment Limit||The minimum investment for NPS is INR 6000 per year. There is no maximum limit. However, the contribution should not exceed 10% of the investor’s salary or 10% of the investor’s total income in case of self-employment.||The minimum investment amount for PPF is INR 500 per annum, while the maximum investment is INR 1,50,000 per annum. Remember though that PPF only allows 12 contributions in a year.|
|Premature Withdrawal||NPS doesn’t allow premature withdrawals for up to 10 years. However, after 10 years, withdrawals are possible with certain limits. Moreover, if the subscriber chooses to opt-out of NPS before retirement, then 80% of the corpus formed has to be used to buy an annuity, preferably a life insurance one.||PPF allows premature withdrawals after 5 years of account opening, subject to certain rules. However, the entire amount cannot be withdrawn as there is a cap on the withdrawal amount.|
|Choice Of Investment||NPF subscribers can choose how to invest the money they contribute. Their choices are between equities, fixed-income instruments, government-linked securities, and so on.||PPF investors don’t have a choice in where their money will be invested.|
|Interest Rates||NPF returns are market linked, and, historically, have fluctuated between 9-12% per annum.||The current returns for PPF are capped at 7.10%.|
|Annuity||NPF subscribers have to use at least 40% of the corpus to purchase an annuity upon maturity of the scheme. However, if the total amount is less than INR 2,00,000, investors won’t have to purchase an annuity.||PPF investors are not required to buy any annuity with the corpus on the maturity of the scheme.|
|Tax Benefits||NPS subscribers are eligible for tax exemption for amounts up to INR 1,50,000 under Section 80C of the Income Tax Act. Additionally, INR 50,000 is also tax exempted under Section 80CCD(2). This means that NPS allows for a tax exemption of up to INR 2 lakhs.||PPF investors are also eligible for tax exemption for amounts up to INR 1,50,000 under Section 80C of the Income Tax Act. However, the additional tax exemption is not valid for PPF. Additionally, the maturity corpus and interest are also entirely tax-free, unlike NPS, where only 60% of the corpus is tax-free.|
|Safety||NPS is not a necessarily safe investment option since its interest rate and returns are market-linked. This means that the ups and downs in the market affect your returns. Moreover, your pension fund manager must also perform well to get you better returns, though it is possible to change your pension fund manager if you are not satisfied with their performance.||PPF is a much safer investment option as compared to NPS since its interest rate is fixed. This means that the returns you get will also be fixed. The government of India sets and issues the PPF interest rates every quarter.|
Calculating The NPS Vs PPF Interest Rate And Returns
There isn’t an NPS Vs PPF calculator to help you calculate and compare the returns you will get on either of these investments. However, it is possible to individually calculate the returns on both of these investments and compare them.
Remember, though, that NPS returns are market-linked while PPF returns are not. This is because NPF interest rates are market-linked, while PPF interest rates are fixed by the government. Historically, NPS interest rates have always been between 9-12% per annum, while the latest PPF interest rate has been calculated at 7.10%. Both NPS and PPF interest rates are calculated monthly.
The following table illustrates the PPF interest rates over the last few years:
|July - September 2022||7.1%|
|April - June 2022||7.1%|
|January - March 2022||7.1%|
|October - December 2021||7.1%|
|July - September 2021||7.1%|
|April - June 2021||7.1%|
|January - March 2021||7.1%|
|October - December 2020||7.1%|
|July - September 2020||7.1%|
|April - June 2020||7.1%|
|January - March 2020||7.9%|
|October - December 2019||7.9%|
|July - September 2019||7.9%|
|April - June 2019||8.0%|
|January - March 2019||8.0%|
The following table illustrates the performance of NPS equity funds. Note that NPS allows a maximum of 75% of the investment amount to be put in equity funds, while the remaining is invested into NPS corporate bond funds or government bond funds.
|Pension Fund||Returns (1 year)||Returns (3 years)||Returns (5 years)|
|SBI Pension Funds Pvt. Ltd||6.30%||14.80%||51.80%|
|UTI Retirement Benefit Fund||5.70%||2.40%||6.63%|
|Kotak Mahindra Pension Fund Ltd||10.40%||25.40%||57.30%|
|ICICI Pru. Pension Fund Mgmt. Co. Ltd||6.70%||14.70%||50.10%|
|LIC Pension Fund Ltd||4.70%||8.20%||41.50%|
|HDFC Pension Management Co. Ltd||7.70%||9.00%||-|
|Birla Sun Life Pension Management Ltd||9.00%||0.30%||17.60%|
Now, let’s consider an example to calculate the NPS vs PPF returns. Ms. Ahana is a 30-year-old who has invested in both NPS and PPF with an INR 5,000 per month. Her interest rate for PPF is fixed at 7.1%, while the interest rate she is getting for NPS has been calculated at 10%. She expects to retire at 60 years of age, meaning her investment period for NPS is 30 years.
Her PPF investments would be worth INR 16,27,284 in 15 years. The investment capital would have been INR 9 lakhs, and the interest earned would have been INR 7,27,284. The entire corpus would be tax-free as investments.
On the other hand, her NPS returns would be worth INR 1.13 crore by the time she reaches 60 years. The total investment she put in would be INR 18 lakhs, and the interest earned would be INR 95.02 lakhs. Now out of the total corpus, Ahana has to invest 40% in an annuity, which means INR 45.48 lakhs would be invested. Meanwhile, the remaining 60%, worth INR 68.3 lakhs, can be withdrawn and would be completely tax-free.
Thus, NPS and PPF are decent investment options for retirement, but they cannot have their limits and cannot be your only retirement planning investment options.
To conclude, both NPS and PPF encourage savings. They are both long-term investment plans with tax benefits that can help you build a retirement corpus. However, that is where the similarity ends since NPS and PPF differ in most other aspects.
NPS stands for National Pension Scheme and requires you to contribute a part of your income to build the corpus, with the minimum investment amount being INR 6000 per annum. On the other hand, PPF stands for Public Provident Fund and requires a minimum investment of INR 500 per month or a maximum investment of INR 1,50,000 per month.
PPF has a lock-in period of 15 years and can be invested in by any citizen of India except NRIs. NPS, meanwhile, can be invested in by any citizen of India between the ages of 18 and 60 years, including NRIs.
The interest rates for NPS are market-linked and fluctuate between 9-12%, while PPF interest rates are fixed and set by the government every quarter. This makes PPF a safer investment option as compared to NPS.
Additionally, since the tenure of PPF is shorter and accounts can be opened by Indian citizens of any age, PPF is not strictly a retirement plan. NPS, however, is accessible only to adult Indian citizens and is most definitely a retirement plan.
Frequently Asked Questions (FAQs)
Can I invest in both NPS and PPF?
Yes, you can invest in both NPS and PPF at the same time to build a bigger retirement corpus.
Is NPS tax-free on maturity?
An NPS subscriber can avail up to 60% of the corpus on maturity tax-free. The remaining 40% must go into purchasing an annuity. Meanwhile, PPF investors can collect the entire corpus and interest tax-free.
How do PPF tax benefits differ from those of NPS?
PPF tax benefits can be availed only under Section 80C of the Income Tax Act, which allows for a tax benefit of up to INR 1.5 lakhs. NPS, however, comes under both Section 80 C and Section 80CCD (1) and Section 80CCD (2), which allows a tax exemption of an additional INR 50,000 along with the INR 1.5 lakhs- this means that with NPS, you will get a total tax exemption of up to INR 2 lakhs.
Can NPS and PPF investments be used for other things besides retirement?
NPS is a retirement scheme that can only be availed by Indian citizens between the ages of 18 and 60. Thus, the money saved is best used for retirement. PPF can be invested in by Indian citizens of all ages and has a shorter tenure than NPS.
This means that if you open a PPF account in your child’s name when they are pretty young, the money can be used to put them through college or to finance a wedding, etc. Thus, PPF is not necessarily a retirement fund, while NPS almost definitely is one.